Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Atlassian Corporation Plc (NASDAQ:TEAM) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Atlassian's Net Debt?
As you can see below, at the end of December 2019, Atlassian had US$871.2m of debt, up from US$836.4m a year ago. Click the image for more detail. However, it does have US$1.94b in cash offsetting this, leading to net cash of US$1.07b.
A Look At Atlassian's Liabilities
Zooming in on the latest balance sheet data, we can see that Atlassian had liabilities of US$2.30b due within 12 months and liabilities of US$312.6m due beyond that. On the other hand, it had cash of US$1.94b and US$125.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$545.2m.
Having regard to Atlassian's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$32.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Atlassian boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Atlassian's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Atlassian wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Atlassian?
While Atlassian lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$505m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Atlassian shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Atlassian you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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